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Tax Law Newsletter I December, 2015: European Union Case Law

Reference for a preliminary ruling - Value added tax - Directive 2006/112/EC - Articles 2, 24, 43, 250 and 273 - Place of supply of electronically supplied services - Artificial fixing of that place through an arrangement not reflecting economic reality - Abuse of rights - Regulation (EU) No 904/2010 - Charter of Fundamental Rights of the European Union - Articles 7, 8, 41, 47, 48, 51(1) and 52(1) and (3) - Rights of defense - Right to be heard - Tax authorities’ use of evidence obtained without the taxable person’s knowledge in the context of an ongoing parallel criminal procedure - Interception of telecommunications and seizure of emails

Within the context of a preliminary ruling procedure, requested by an Hungarian court, the European Court of Justice (ECJ) issued a judgement on whether, in light of the Member States’ obligation to charge the full amount of VAT, the tax authorities, at the evidence stage of an administrative proceedings, for the purpose of clarifying the services rendered and the identity of the provider, can rely upon data, information and evidence obtained from ongoing parallel criminal proceedings, without the taxpayer’s knowledge, and base the conclusions of the tax administrative proceedings in those elements. In addition, the ECJ considered the possibility of an administrative and tax court to resolve an appeal filed against the administrative decision of the Member State’s tax authority, based on the value of the evidence obtained from an ongoing parallel criminal procedure.

The ECJ began by confirming that, based on wide discretion granted to the Member States to guarantee the collection of all VAT owed in their countries and to fight tax evasion and fraud, the tax authorities may obtain and use evidence initially attained for the purposes of criminal proceedings, via criminal process, in the evidence stage of an administrative procedure.

However, to guarantee the respect of the rights of defense established in article 48 of the Fundamental Rights Charter of the European Union (the Charter) and the principle of good administration under its article 41, the tax authorities are obliged to give access to the evidence obtained and to hear the taxpayer.

In the issue in question, the data had been obtained by intercepti ng communications and seizing electronic mail messages during visits to the taxpayer’s professional installations, interfering with the rights guaranteed by article 8.1 of the European Human Rights Convention and article 7 of the Charter.

Thus, the ECJ clarified that these restrictions can only apply if they are established by law and if, complying with the principle of proportionality, they are necessary and relate to the objectives of general interest recognized by the EU. The court added that, if the interceptions of telecommunications and the seizure of electronic mails were carried out within the scope of criminal proceedings, its objective and necessity must be assessed in that light.

Thus, the ECJ considered that the fight against fraud, tax evasion and potential abuse is an objective recognized and encouraged by the VAT Directive. Consequently, in this case, the investigation measures applied within the criminal proceedings, envisaging the repression of tax infringements, foresaw a general interest objective recognized by the EU. The court further reminded that, in this case, before reaching a decision, the tax authorities gave access to the transcriptions of the telephone conversations and to the electronic mail messages used as evidence, as well as the fact that the taxpayer had the possibility to be heard on such events before a decision being taken.

Therefore, the ECJ concluded that, in regard to the application of articles 4, number 3, TUE, 325 TFUE, 2nd, 250.1, and 273 of Council Directive 2006/112/EC, of November 28, 2006, on the common system of value added tax, the EU law must be interpreted in the sense that it allows the tax authorities to use evidence obtained within an ongoing parallel criminal procedure, in order to verify the existence of an abusive practice in terms of value added tax, without the knowledge of the taxpayer, for instance, by intercepting telecommunications or seizing electronic mail messages, as long as the collection of such evidence does not breach the rights guaranteed by EU Law.

The ECJ also concluded that, under circumstances such as the ones from de main proceedings, considering the articles 7, 47 and 52(1) of the Charter, the jurisdictional body of reference, whom analyzes the legality of the VAT settlement based on those evidence, shall verify if the interception of telecommunications or the seizure of electronic mail messages were provisioned for by law and necessary under the criminal proceeding. On the other hand, the jurisdictional body of reference shall verify if the use of evidence obtained by those means was legally authorized and necessary. Moreover, that jurisdictional body shall verify if, according to the principle of protection of the defendant’s rights, the taxpayer was allowed access to those evidence and had the possibility of being heard during the administrative procedure.

If the jurisdictional body of reference concludes that such taxpayer did not have the said possibility, or that the evidence was obtained within the criminal proceedings or used in the administrative proceedings in breach of article 7 of the Charter, it must disregard the evidence and annul the decision if, for those reasons, it becomes without grounds. Such evidence must also be disregarded if the jurisdictional body is not authorized to verify whether the evidence was obtained within the scope of criminal proceedings under EU laws or if it is not able at least to ensure, on the grounds of a verification already made by a criminal court within the scope of an controversial procedure, that the evidence was obtained in accordance with EU law.

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